Does Crowdfunding Work in Venture Capital?

June 24th, 2018

Investors may wish they’d never heard the words “Reg A+”, a class of small stock offerings unleashed by a 2012 federal law dubbed the JOBS Act. These mini-IPOs have performed poorly, on average, and led to some alarming fraud allegations. But Ryan Feit believes that profit-making prospects remain promising for deals done under the other part of the JOBS Act, which enables crowdfunding.

Feit is the chief executive of SeedInvest, a crowdfunding platform that has been raising money for early-stage ventures on its website since federal rules for such offerings took effect two years ago. Investors have put more than $100 million into SeedInvest deals, says Feit, who claims the returns have been better than those of traditional venture capital funds.

Crowdfunding portals like SeedInvest raise money for a startup business by letting lots of individuals each put in a small amount of money. “One of the questions that we get a lot about crowdfunding is: ‘How have investors done?'” says Feit.

The answer comes with some caveats typical of venture discussions. SeedInvest says that the unrealized internal rate of return on its investments has averaged 17.4%, since the firm started putting money to work in 2013 (including private placements, before crowdfunding became legal in 2016). Over a similar stretch, the returns at an average U.S. venture fund have been 11.7%, according to stats that SeedInvest cites from the venture benchmarks at consultants Cambridge Associates.

Note the word “unrealized.” Like most venture investments, the shares of the private companies funded through SeedInvest don’t trade on public markets, where their value could easily be measured. So SeedInvest tallies the increase or decrease in a company’s value when it raises money in a follow-on round of funding. Feit acknowledges that such unrealized returns could differ materially from those eventually realized in an IPO or acquisition, but that’s how venture capital measures itself. “It’s the way that all VC funds calculate their returns,” says Feit. “Venture investments can take years to actually see a realization.”

Through the end of last year, SeedInvest has arranged 72 funding rounds for companies, with 32 of those being the follow-on rounds whose valuations went into SeedInvest’s calculation of its unrealized returns. The results haven’t been audited, but SeedInvest says it dutifully tracks each of the 24,584 investments that have been made on its platform by 14,394 individual investors.

It’s still early days for crowdfunding and SeedInvest, but Feit argues that his company’s platform is a safer place than other crowdfunding portals that list any company that wants to raise money. SeedInvest is a registered broker-dealer and it performs due diligence before letting a company raise money on its website. It claims that over 25,000 startups have applied to use its platform in the past five years, but only about 1% have made the cut. And SeedInvest has avoided the troubled world of Reg A+. “We’ve never done any publicly-listed Reg A+ deals,” says Feit. “And all the ones that we’ve seen, we would never touch in the first place.”

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